Benefits to the Poor of Texas Franchise Tax Repeal

Studies | Taxes

No. 357
Tuesday, June 24, 2014
by Ryan H. Murphy

Texas continues to grow, even in the face of a recession and the weak recovery. From 2008 to 2014, real gross domestic product per person in the United States did not grow, but in Texas, per capita GDP rose 4.7 percent. This has swelled public coffers and offers Texas the opportunity to eliminate the most counterproductive part of the tax code: the franchise tax.

Executive Summary

In 2013, the Beacon Hill Institute at Suffolk University modeled the economic benefits of eliminating Texas’s franchise tax. The franchise tax is a tax on capital. Instituted to raise revenue for school districts, the franchise tax is calculated in a number of different ways and has gone through a few iterations.

Beacon Hill researchers estimated that if Texas had eliminated the franchise tax in 2013:

Investment would surge by $3.2 billion, growing to $3.4 billion by 2017.

Texas would gain $6.4 billion in real disposable income in 2013 and, cumulatively, $9.8 billion by 2017.

In the first year, private sector employment would grow 31,500, and the cumulative total in 2017 would be 41,500 additional jobs.

This study extends that analysis by examining how the economic benefits of franchise tax repeal would be distributed among households at various income levels. Some will be surprised that most of the benefits of repealing this tax on capital will flow to households that are not rich. Indeed, households with annual incomes of less than $100,000 a year would benefit most, measured as a percentage of their incomes and in absolute numbers of dollars. Even the poorest households would benefit disproportionately, compared to upper income households. Specifically:

The poorest Texas households, with annual incomes of less than $10,000, earned only 3.34 percent of income in 2010, but would receive nearly 4 percent of the additional income over the 2013 to 2017 period.

Households earning $50,000 or less annually received nearly one-third of income (30.2 percent) in 2010, but would receive more than one-third (35.58 percent) of the additional income.

Nearly half (48.43 percent) of income was received by households with incomes of $75,000 or less in 2010, but they would receive more than one-half (56.31 percent) of the increase.

Three-fourths of income in Texas was received by households with less than $150,000 in annual income in 2010, but they would receive more than four-fifths (83.29 percent) of the increase.

Over a five-year period, households making less than $35,000 per year would receive $2.2 billion in economic benefits if the tax were eliminated. Households under $100,000 per year would receive $6.9 billion.

Inequality has become a big topic in today’s political debates. Certain tax regimes may be economically beneficial, but will give rise to greater inequality. But it is important to distinguish between policies that may on average be good for households overall, but hurt the poor, and policies which help everyone, including the poor, but make official inequality statistics look worse. Even if the latter policies make Texas more unequal, they still benefit the poor, which is what we should really care about.

The elimination of taxes on capital, like Texas’s franchise tax, will yield genuine economic benefits for the poor, even though many benefits go to the wealthy. Taxes on capital are a not an efficient way of raising revenue for the government, which is why eliminating it can help everyone.


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